Market Report, "Lithuania Business Forecast Report Q1 2014", published

Improvement in household consumption and a strong export sector performance in H113 point to another year of fairly robust economic growth in Lithuania, prompting us to lift our full-year real GDP growth forecast from 2.6% to 3.4%. Despite anticipating a slight drop in household spending growth in 2014, we believe that a gradual improvement in fixed investment and still strong export levels will see real GDP growth accelerate to 3.6%.

Improving economic conditions and Lithuania's rising international profile during its presidency of the EU mean that the ruling centreleft government is well placed to remain popular. That said, having seen its plans to develop the country's shale reserves fail to materialise when US energy firm Chevron decided not to proceed with the project due to regulatory changes, the government could yet be judged harshly for jeopardising an opportunity to achieve one of its key goals: greater energy independence.

Full Report Details at
- http://www.fastmr.com/prod/713433_lithuania_business_forecast_report_q1_2014.aspx?afid=303

Lithuania's fiscal position has improved markedly and rising economic activity should see a further narrowing of the nominal fiscal deficit in 2014. Although higher interest rates may restrict the authorities' ability to take on more debt, we believe that an effort will be made to deepen local capital markets, to improve private sector access to debt over the coming years. For now, we believe that the prospect of higher interest rates will preclude a major increase in government outlays in the medium term.

Major Forecast Changes

We revised up our 2013 real GDP growth forecast from 2.6% to 3.4% and see 2014 growth coming in slightly lower than previously projected at 3.6% (down from 3.7%).

We now forecast a lower merchandise trade deficit in 2013 than previously, seeing the shortfall narrow to 2.0% of GDP from our previous forecast of 3.3%.

Key Risks To Outlook

We believe that the immediate risks to our economic growth outlook lie to the upside, given that a robust performance in gross fixed capital formation in H113 could extend into the second half of the year, which would see stronger fixed investment growth in 2013 than we are currently forecasting.

In the near term, the risks to our fiscal outlook are that the Lithuanian government succeeds in bringing the nominal deficit down more than we currently forecast, as tax collection improves amid rising economic activity.

Although the eurozone economy is emerging from recession, activity levels remain low and an unexpected drop in German factory orders from abroad in August could lead to a drop in goods export levels in Lithuania over the coming months. This could see the current account deficit widen more rapidly than we currently forecast and put a strain on debt levels in the economy.

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